Net sales are the amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The company reports its net sales figure on its balance sheet. Some key conditions may explain the decline in net sales of a company despite increasing revenues.

Company Sales Returns Policy

The sales return policy of a company can account for declining net sales, even with increasing revenues. Increases in revenues may be temporary, such as those brought about by aggressive marketing tactics. As such, customers such as retailers may order in bulk during certain months when distributors aggressively push sales. Distributors may aggressively push sales to qualify for certain incentives or to meet their sales quota for the month.

In turn, if the parent company has a very lax sales returns policy, retailers can return unsold items to distributors and either exchange them for other items or offset them against the retailers' accounts payable to the distributor. In turn, the distributor returns these items to the parent company, which causes a decline in the net sales of the company over the period.

This was the experience of a Philippine company specializing in perishable industrial chemicals. The company executives were shocked with sudden dips in net sales figures for the year, which is often far from their revised sales forecasts. Upon investigation, these dips came from returns of their products by distributors. The bulk of these returns occurred during the final weeks of December, which is the close of the company's fiscal year. Many of these returned items had to be written off, since they were nearing expiration or were already expired. Thus, the company revenues for the year were increasing, but its net sales were decreasing. The company revised its sales return policy, and it experienced a significant increase in net income for the subsequent year.

Aggressive Discount Policies

In an effort to increase revenues, companies might embark on aggressive discount policies, such as increasing the cash discount for prompt payments. If revenues do not improve as much, the corresponding increase in sales discount might eat the marginal increase in revenue. This would cause an increase in sales revenue but a dip in net sales reported.

Cash discounts are different from trade discounts, since trade discounts are not recognized as part of sales revenue. Even with an aggressive trade discount policy (such as a 20% reduction in catalogue price), the catalogue price itself would not form part of gross revenue. However, the price prior to the application of the cash discount is part of gross revenue.

Revenue generation is a very important aspect of every business as revenue drives growth. However, liberal returns policies or aggressive discounts may decrease net sales and cause unexpected losses. These matters are the subject of internal management discussions, and it is important to be wary of the effects of these promotions to ensure that sustainable growth is achieved.

  1. What can gross sales tell you about a business?

    Learn more about gross sales and net sales. Find out what the gross sales figure reveals about a business and how investors ... Read Answer >>
  2. Does gross profit account for sales returns?

    Discover how accountants record the return of a saleable item and how that might impact the gross profit for a firm, either ... Read Answer >>
  3. What is the difference between the cost of capital and the discount rate?

    Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ... Read Answer >>
  4. How can I find net margin by looking a company's financial statements?

    Learn how to calculate a company's net margin using financial statements by dividing the company's net revenues by its net ... Read Answer >>
  5. What are the disadvantages of using net present value as an investment criterion?

    While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no ... Read Answer >>
  6. What is the difference between revenue and income?

    Revenue is simply the total amount of cash generated by the sale of products or services associated with the company's primary ... Read Answer >>
Related Articles
  1. Investing

    Net Sales

    Net Sales is an accounting term used to analyze a company's performance. It is the sales revenue that remains after deducting for product returns, damaged or missing products, and discounts. ...
  2. Investing

    Understanding the Top Line

    Top line refers to a company’s gross sales without any reductions for discounts or returns.
  3. Retirement

    Top Discounts For Seniors

    Here is a rundown of some of the best senior discounts across the country.
  4. Small Business

    Companies That Offer Unique Employee Discounts

    These companies offer employees great discounts and unique incentives you don't find with your average employer.
  5. Investing

    How Do Companies Calculate Revenue?

    Revenue is the money a company receives in exchange for its goods and services.
  6. Retirement

    Senior Discounts Alert: National Parks Pass Rises Aug. 28

    First, Social Security rose a measly 0.3%. Now, the national parks lifetime pass is going up 8 times. Yet another reason to save with senior discounts.
  7. Investing

    What is Net Margin?

    The ratio of net profits to revenues for a company that shows how much of each dollar earned by the company is translated into profits.
  8. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  9. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  10. Investing

    Discount Broker

    A stockbroker who carries out buy and sell orders at a reduced commission compared to a full-service broker, but provides no investment advice.
  1. Net Sales

    The amount of sales generated by a company after the deduction ...
  2. Discounting

    The process of determining the present value of a payment or ...
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks ...
  4. Market Discount

    The difference between a bond's stated redemption price and its ...
  5. Discount Yield

    Discount yield is a measure of a bond's percentage return. Discount ...
  6. Third-Party Distributor

    A third-party distributor is an institution that sells or distributes ...
Hot Definitions
  1. Earnings Per Share - EPS

    Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock.
  2. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  3. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  4. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center